It’s been an interesting summer for blockchain. We’ve seen Facebook’s Libra white paper launch, David Marcus testify in front of Congress on Libra’s behalf, Congress ask some interesting questions about the technology and regulators scrutinize Facebook’s use of it. Regardless of the responses by different parties, Facebook’s blockchain entrance via Libra, and the subsequent media and congressional reaction, created a buzz that demonstrates this technology is no longer unconventional. Distributed ledger technology has been around for over a decade, is still here now and is not going away. In fact, it’s usage across a variety of industries is likely to expand dramatically over the next decade.
While most are familiar with blockchain through bitcoin (a distributed peer to peer payment protocol with its own cryptocurrency), there are some very interesting elements underscoring Facebook’s blockchain approach. But, before getting into that, it’s important to describe one element of the technology more specifically. Blockchain, or distributed ledger technology (DLT), is unique in that it is network-based. The majority of blockchain projects, like cryptocurrencies, are public and permission-less in that anyone can participate in the verification/consensus system. There are nearly 2,500 cryptocurrencies, each of which has its own blockchain or distributed ledger. While cryptocurrencies are quite revolutionary in their own right, much of the business usage is occurring on private permissioned blockchains or distributed ledgers, which have restricted networks. The network remains important in these alternatives, perhaps even more so.
Although blockchain and distributed ledger technology could be leveraged within an organization to bring various departments together, it is unlikely that operating a company-specific blockchain will be as productive as operating a blockchain or DLT that involves a larger network of competitors. In this instance, that network can be closed (via permissions) to a certain few or an industry. If a private permissioned network of this sort is leveraged, network participants must join together in order to get the most out of blockchain or distributed ledger technology, working collaboratively and collectively to design holistic blockchain solutions.
The insurance industry has already developed a network for this. The Institutes RiskStream Collaborative has brought 40 brokers, insurers and reinsurers together to build a consortium that is creating blockchain applications solutions for personal lines, commercial lines, reinsurance and life and annuities. With RiskStream and other initiatives at the forefront, the insurance industry has surprisingly been a trailblazer when it comes to leveraging blockchain technology. For example, a report by McKinsey & Company found that the insurance industry accounts for the most blockchain uses (22 percent of the total), distantly followed by the payments industry (13 percent). Another report by Boston Consulting Group, found that blockchain usage could lead to a 5-13% improvement in combined operating ratios across various lines of insurance. Put simply, there are a lot of use cases in risk management and insurance for this technology and its usage could save insurers, brokers and reinsurers a lot of money.
While insurance is steadily moving toward the adoption of blockchain-enabled products, other industries have been slower to build their own networks or consortia. Nonetheless, cross-industry consortia, like the Enterprise Ethereum Alliance or Hyperledger, have emerged, each leveraging their associated platforms for various cross-industry initiatives. Facebook’s Libra Association is another very notable example of a cross-industry consortia, but it’s quite unique in that its goal was a payment-oriented use case, which in some ways mimicked cryptocurrency, similar to Venmo or Paypal. The Libra Association is attempting to bring approximately 30 companies to build the Libra platform and allow for peer to peer payments using Libra coin (which aims to act as a global stable coin backed by stable currencies and securities). The emergence of Libra has garnered a lot of attention and its introduction and challenges present several lessons for existing consortia, even in the insurance space. That said, Libra likely has more to learn from existing consortia, like RiskStream, than the other way around.
Who is RiskStream?
As the name suggests, The Institutes RiskStream Collaborative emerged from The Institutes, which is a not-for-profit formed over 100 years ago out of The Wharton School. The Institutes provides many services, but it is best known for its education and research offerings for the risk management and insurance industry. The Institutes educates more than 100,000 insurance professionals annually and has a board of CEOs who collectively represent a substantial majority of domestic insurance premium volume and a sizable international presence. The point being is that blockchain requires a network which The Institutes has already established.
The Institutes RiskStream Collaborative is a separate non-profit that has been working on blockchain and distributed ledger solutions for several years. Today, RiskStream operates as a consortium that uses its network to develop industry-specific blockchain and DLT applications for varied insurance-related use cases. RiskStream members (carriers, brokers or reinsurers) are involved in leading all areas of RiskStream’s governance and activity. For example, members work with RiskStream staff to design use cases on behalf of the industry and then work with RiskStream staff and service providers to build out the use cases.
RiskStream incorporates solution providers, like Accenture and EY, through its solution provider program. These solution providers help by building out the RiskStream framework (known as Canopy), the use cases and ensuring the underlying distributed ledger is completely secure. Thus far, RiskStream has DLT use cases designed or built for personal lines, commercial lines, reinsurance and life and annuities.
Where Facebook’s Libra Fits
As blockchain took off in banking and insurance, Facebook and other tech giants took notice. Despite the lack of public exposure, most of the tech giants, including Facebook, have had silent blockchain initiatives for several years. Their project, now known as Libra, began with one employee in 2017, but didn’t take off until more employees engaged in mid-2018. By June 2019, Libra and its membership was formally announced.
While Libra is often compared to cryptocurrencies in that it is oriented toward peer to peer payments and uses a form of blockchain technology, it is quite different from traditional cyrptocurrencies. First, while bitcoin, for example, is a public or permission-less blockchain, Libra’s blockchain aims to be private/permissioned, with a goal of eventually moving to a permission-less blockchain. Its current private/permissioned aspect is important because it indicates that only certain companies can join the Libra network. Twenty eight founding firms have joined the network (more on that below). Second, while bitcoin and other cryptocurrencies are governed in a permission-less manner and through the protocol itself, Libra plans to be governed by the Libra Association – the group/network of 28 or more companies, including Facebook. Third, Libra’s use case is similar to certain cryptocurrencies that focus on peer to peer payments. That said, many cryptocurrencies have a scarce money supply, which have fueled the relative value (as traditional fiat currency money supplies expanded), but cryptocurrency price appreciation has also been linked with price volatility. Many who purchase bitcoin and other cryptocurrency HODL (an industry term that means that means buy and hold) due to this, assuming that the scarcity relative to exponential traditional fiat currency growth will lead to price appreciation eventually, even if there is volatility. Unlike these cryptocurrencies with a fixed-growth supply, Libra aims to operate more like a stablecoin or traditional money. Examples of stablecoins include Tether (backed by USD), GDIX (commodity backed), or DAI (cryptocurrency backed). The goal of a stablecoin is to focus on exchange and encourage daily usage, by limiting volatility and pegging on an existing asset. For Libra, this meant attempting to stabilize any inherent volatility by basing each LIBRA unit on a basket of traditional currencies and securities.
The concept that Facebook has launched is certainly compelling, but it’s not without challenges. Congress called for a hearing as soon as it learned about Libra. The U.S. Treasury and other international bodies have since expressed serious concerns regarding Libra. Facebook has promised that Libra won’t be made available until regulators are on board.
Lessons Thus Far
It’s been interesting watching Facebook’s approach to Libra, particularly given the steps The Institutes RiskStream Collaborative has taken over the last few years. Some of the decisions Facebook has taken support RiskStream’s approach, others completely distance it from RiskStream’s strategic purpose, while others are completely unrelated due to the underlying use case Libra is pursuing. We provide a quick overview of some of these below:
At its heart, blockchain (and the broader distributed ledger technology) is network-driven. While the technology provides a means to work on challenges, in a private network a non-partisan arbiter is needed to bring parties together to design, test, implement and adopt the technology. Leveraging a third party with blockchain is indeed ironic, given that the technology tends to disintermediate. However, it’s needed in a closed network as competitors won’t easily get together to work on industrywide challenges that affect consumers without an arbiter.
To lead the development of this body, the insurance industry has chosen to leverage The Institutes, an organization that’s been around for over 100 years, providing services to the insurance industry including designations, research, facilitation and education. The Institutes RiskStream Collaborative aims to support its members in designing blockchain solutions for risk management and insurance.
On the other hand, Facebook has decided to create its own non-profit, The Libra Association. There are some similarities in the approach. Facebook clearly agrees that a non-profit needs to be at the center of a blockchain consortia. However, the approach of the non-profit being birthed by one of the largest for-profit entities in existence is quite different from The Institutes RiskStream Collaborative model.
A key element related to blockchain is trust. It’s also important here. One of the reasons the insurance industry feels comfortable with The Institutes leading this charge is the organization has been trusted for over 100 years to provide credentialing and has helped facilitate competitors working with one another in the past to produce industrywide products and services that benefit both the consumer and the industry. While The Institutes has a past of teaching ethics to the insurance industry, some have questioned Facebook’s ethical approach to data collection recently. Therefore, whether the suspicions are well founded or not, there is a degree of mistrust for Facebook. Establishing a non-profit Libra through the parent company of Facebook may not change that public perception.
- Platform Agnostic
While the network provider and the affiliated trust are inputs in a sense, certain elements are evident outputs — for example, the approach to “blockchain” usage itself. In the grand scheme of things, its unknown which blockchain approach today will end up being the best in 10 to 20 years from now. There are public non-permissioned approaches as well as private permissioned approaches, and hundreds of potential platforms for networks to choose from scattered in each approach.
RiskStream, led by its members, has decided to build a framework architecture called Canopy which has an underlying goal of platform agnosticism. RiskStream needed to choose one to start with and originally chose ethereum. But based on member input, it switched to Corda as the initial platform in early 2018. RiskStream has built Canopy in such a way that members may decide to leverage other platforms, including ethereum or others (like Hyperledger Fabric, Quorum, etc.) in the future. Meanwhile, Facebook is building its own proprietary platform for Libra. It is not using any existing platforms, and is betting on the platform it develops. This doesn’t help with the lack of trust mentioned above, particularly given some of the data privacy concerns previously associated with Facebook.
- True Members
Finally, at RiskStream we’ve learned a lot about recruiting membership and trying to ensure all members are equally satisfied. This is a challenging task within a consortium of members who may have different preferences, which The Libra Association will also have to navigate accordingly. On that note, it was announced that Facebook has 28 member companies. However, according to some of these members, those advertised as Libra Association members have only signed a non-binding letter of intent. This does not indicate full membership, yet. That said, it certainly indicates a good sign of interest. On a whole, the Libra initiative has been positive for the blockchain space. The underlying use case of reaching out to the 2 billion unbanked and providing a means for peer to peer payments is undoubtedly a noble cause. Nonetheless, there are going to be challenges for the Libra Association to navigate. The ongoing insurance industry initiatives, like RiskStream, also have noble underlying use cases and will have challenges along the way to insurance adoption. Both parties can learn from one another as we move down our separate paths. Who knows, maybe there will be a chance to collaborate down the road.